What's My Exit Strategy in a Multifamily Deal?

Questions to Make Before Making a Multifamily Offer

by Charles Dobens on March 25th, 2019

What two questions must you be able to answer before you make an offer on any multifamily deal? When my students bring me a deal to review, I always ask these two questions. If they know the answers without giving it a second thought, make the offer. If they can't - MOVE ON!

Here are the two questions you've got to ask yourself when you're analyzing any deal.

When I get into the Cash Flow Analyzer software and receive the offering memorandum from students, I start looking at it and call them up. As soon as we discuss it, they can't even answer the first question. If they can't answer the first question, most likely they can't even get to the second question. So let me tell you what it is that I'm talking about.

The first question is, what's my exit strategy? Why am I buying this property? What is it about this property that excites me? If I'm going to sit in front of a group of investors, I can say, “this is a good deal, because…” You've always got to be able to answer that question. What's my exit strategy?

There are typically the same types of exit strategy in every deal. You got the buy and hold, You got the wholesales. You got the fix and flips. You got the rehabs. You got what we call forced appreciation. So here’s what I did here.

The buy and hold properties are those properties that are strong properties and with steady increase of cash and cash return and the internal rate of return every single year. It's an easy to own and operate property. That’s the type of properties that you want to buy and hold.

But you can have combinations of these two, like what Corbin's doing. He's doing rehab, but then he's going to hold it. So, you can have different combinations. My question to Corbin was, how are we going to refinance this out? I mean, how much equity will you have? Will you be able to flip it? Are you going to fix and flip it? And he says, “No, I'm going to rehab it. I'm going to fix it up, then I'm going to keep it and I'm going to just use that as my launching pad for my next property.

So you can have multiple exit strategies as we go through the deal. In the multifamily world, it's a tough business to be into wholesale. I know I've got a course up there on wholesaling but the thing is, the only way that you're going to make wholesaling work is if you steal the property. You’ve got to put your vague in there, and they're going to make it enough so that another buyer, who is going to come in there and sweep it up, would be able to finance it very quickly.

I remember, I was teaching at a REIA club one time, and they have a section in there where people would get up and talk about the deals that they had. And so, this one guy got up and he just got out of somebody's weekend wholesaling course. And he's like, “I bought this property for $195K. And the after repair value is $200K. And I want to wholesale it.” And I was like, what's this guy talking about? This guy obviously doesn't get it.

Like for instance, Corbin got a property and bought it for $100,000, he could flip that contract tomorrow and make quick money, easily. That's a perfect wholesale opportunity.

Now, what do you get when you fix and flips? What we're trying to do here is I'm trying to show you what the cash flow analyzer is going to look like to make this deal jump out. Remember, when you're doing a fix and flip, you got to put into the cash flow analyzer the funding for the rehab.

I'm going to keep using Corbin here since he is actually working out perfectly. Corbin says I am going to need $100,000. Well, if you don't put that $100,000 in the cash flow analyzer, the numbers are wrong. You can't pitch that to some investor, you've got to account for that $100,000 in the initial improvement section. So you've got to make sure that the cash flow analyzer is telling the story of your exit strategy.

Then the thing is, when you're doing a fix and flip, you want to get in and out as quickly as you can. That means you've got to lease it back very quickly. So when you get in there and start doing the rehab, your occupancy will be low. And then, you’ve got to lease that thing up as quickly as you can and sell it. Then, you get out of it.

All of the cash flow analyzer numbers have to show up there so that we know what we're talking about. Gertrude asked a question, should we just focus on one strategy? Absolutely not. Every property is going to be different. Every property is going to have its own story to tell. You just have to make sure the story that that property is telling is told through the course of your numbers and that you're doing it right.

Corbin's exit strategy is to buy and hold. For you to do that, you're going to have to come up with a lot of money up front. He said, “that's why I'm buying the property really low. I've got seller financing. I'm going to use a bridge loan for the $100,000. I'm going to put it in there. I'll be in the deal for 200,000 then I'm going to refinance that property. I'm going to take out a bunch of money and I got four units in there. They're going to be absolutely perfect. They're going to run beautifully and it'll be paying for itself. I'll take the next chunk of money and buy another deal.”

Wow! That guy has it figured out! What a great exit strategy!

Now, the rehabs. When I talk about rehabs, I’m talking about Doug Benson rehabs with the trademark. So, its Doug Benson Rehabs ™. What you're really doing in that case, is you're going in and you're kicking everybody out. And you're turning every single unit right away as fast as you can, letting it, getting it, or at least back up. You can either hold it, sell it, refinance it or so many different options.

But rehab can also come with the financing. So when you're doing a rehab, your numbers have to once again show all the funding costs right up front and you better drop that rental income number because you're kicking everybody out. This property is not making a dime and then you're going to show the increase in the rent. So, you get to the rents as of today, which is a drop down and then the after repair value rates. That's going to explain why you're really driving that property. So that's what we do with rehab. That's why Doug Benson Rehab ™ can make you a lot of money and make you filthy rich as you sit in your clogs in your Lansing Michigan home.

The final one is where millionaires are made. All that we're really doing here is running the property the right way. But the terminology that they called it for is forced appreciation. That’s where you're driving the NOI. Because when you drive NOI, which is the only thing that you can control, you're going to increase your net worth very significantly. The way you do that is, you find and take a property with below market rents and you increase them. And then you get control of those expenses because the property is running at a 60% expense ratio, when it shouldn't be running at about a 45% expense ratio. That's like what I use in my teaching Event Creek Property.

So, the first question you have to ask is, what is your exit strategy? And when you guys send me deals, I'm going to start hitting you up with this. You better have the answer for these questions.